Term Sheet
A term sheet is a non-binding document outlining key economic and governance terms of an investment, usually before definitive agreements.
Allocator relevance: Terms drive outcomes—valuation, preferences, and control provisions can dominate return profiles in venture deals.
Expanded Definition
Term sheets define valuation, security type, liquidation preference, pro-rata rights, board structure, protective provisions, and closing conditions. While “non-binding,” they set the real negotiation frame. In venture, small term differences compound across rounds and affect exit waterfalls.
Allocators care because manager term discipline is a key underwriting skill, especially in competitive markets.
How It Works in Practice
A lead investor proposes/negotiates the term sheet; lawyers translate it into definitive documents. The round closes once conditions are met.
Decision Authority and Governance
Within funds, governance should ensure term review and approval discipline, not just excitement-driven participation.
Common Misconceptions
- Term sheets are standard and not worth attention.
- Only valuation matters.
- Non-binding means unimportant.
Key Takeaways
- Term sheets set the economics and control architecture.
- Preference structure and rights matter massively.
- Discipline on terms is part of manager skill.